The drivers of Indian gold demand Report
This is the choicest part of the report,
the drivers of Indian gold demand,
published by the World Gold Council (WGC)
This bodes well for gold demand as the economy is set
to benefit from a demographic dividend:
the IMF forecasts per capita
GDP growth of 23% between 2022 and 2026
While India is the second largest consumer of gold, its per capita consumption is low. And demand faces challenges in the short term: from declining household savings rate and agricultural wages. Income may be the key long-term driver of demand, but it is affected by a variety of other factors, including policy measures.
Support from such measures is currently lacking as policy makers view gold demand solely through the prism of imports. Meanwhile, industry efforts to improve transparency are not cohesive. Building trust and improving awareness among consumers, together with innovation, can play a role in enhancing the image of India’s gold industry, boosting domestic demand and allowing it to play a pivotal role in rebuilding household finances in the post-Covid world.
Collective drivers of gold demand:
The drivers of gold demand in India are many and varied. Cultural affinity, long-held tradition and festive gifting clearly play a significant role. But these qualitative factors are complemented by quantitative factors, which offer additional and important insights.
In this report, the first in a series of in-depth articles on the Indian gold market, we assess gold demand from a range of perspectives, both quantitative and qualitative. First, we consider the findings of a comprehensive econometric analysis of the long- and short-run determinants of Indian gold demand.
Second, we analyse demographic, socio-economic and related developments that are likely to shape demand both today and in the future.
We also delve into aspects of Indian demographics and economic development that may help us to understand gold demand today as well as look to the future.
2: Gold price level: for each 1% increase in the rupee based price of gold, demand falls 0.4%.
3: Government levies: import duties and other taxes affect long-term demand but the magnitude varies depending on whether gold is bought as jewellery or bars and coins.
While the influence of income and price on demand may be widely expected, their comparative weight is perhaps more surprising. Simply put, demand responds more to income than it does to price. This was clearly demonstrated between 2000 and 2010, when demand increased by more than 40% increase from around 700 tonnes to 1000 tonnes per annum, even as the rupee gold price soared by 137%. At the same time, per capita income rose 77%, more than offsetting rising prices.
Short-term drivers:
Our research also reveals the key econometric factors that influence short-term demand for gold. 1: Inflation: in common with investors around the world, Indian savers turn to gold as a hedge against inflation. For each one percentage point increase in inflation, gold demand increases by 2.6%.
2: Changes in the gold price: while steady price increases or decreases affect long-term demand, sharp price changes have an impact on short-term demand. For each 1% fall in the gold price in any given year, demand increases by 1.2%. 3: Tax regime: an increase in the rate of import duties since 2012 has depressed demand for gold by 1.2% per year.
4: Excess rainfall: a while the monsoon has less of an impact on demand than in the past, it still affects consumer behaviour. A 1% increase in rainfall, compared to the long-run average, boosts gold demand by 0.2%.
Our econometric model: Our analysis centred on gold jewellery demand, as this accounted for more than 75% of total demand for gold in India between 1990 and 2020. In general, jewellery demand is more influenced by long-term drivers while demand for gold bars and coins tends to respond more sharply to short-term factors, such as inflation or tax. Overall, however, our model provides a useful overview of some of the key factors affecting demand for gold over both the long- and the short-term, particularly income, price, inflation and fiscal policy. As such, it can be used as a framework to help understand broader market trends and consider how they might influence gold demand over the coming years.
Outlook:
Demand for gold may be more subdued than expected this year, following India’s prolonged battle with COVID-19. However, imports remain strong and retail demand is expected to pick up, as restrictions are gradually lifted across the country. In 2022, economic growth and the impact of pent-up demand for gold are likely to presage a period of robust demand, although any future outbreaks of coronavirus could create further uncertainties.
Looking longer term, the Indian gold market is influenced by both positive and negative factors. On the upside, the economy is expected to benefit from several robust structural factors. 1: First, rapid growth in the working age population over the next two decades will create a strong and sustained demographic dividend.
2: Second, continued urbanisation will drive and support economic expansion. 3: Third, higher penetration of both the manufacturing and services sectors in rural areas will reduce their reliance on agriculture and deliver more stable incomes for millions of households.
4: As our econometric model illustrates, rising incomes are one of the biggest single drivers of long-term gold demand. This suggests that, as India’s economy grows, demand for gold should increase. However, the Indian gold market also faces several challenges.
5: Households are saving proportionately less than they used to, which may reduce the amount of capital they allocate to gold. 6: Financial inclusion is increasing, which provides investors with other sources for their savings beyond physical gold.
7: Government policies can impact demand and inadvertently foster India’s unofficial market. 8: Agricultural wages are still in decline, despite government actions in recent years.
Taking all these factors into consideration, it would seem that the gold market is at a crossroads. Should government plan to increase farmers’ income by 2022 succeed, this would boost rural wages, lending further support to the market. Should the government choose to impose further tax increases, import restrictions or other adverse policies relating to gold, demand could be stifled or driven underground.
Looking ahead, it would appear that India’s gold market is most likely to benefit from positive demographic and socioeconomic changes if the industry takes steps to become more transparent, more standardised and more in line with global peers.
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